Policy Exhaustion Can Limit the Duty to Defend Under Connecticut Law

By and on February 26, 2015
Leave a comment

Assessing whether the duty to defend terminates on policy exhaustion can become a complex analysis when a claim involves multiple plaintiffs and exposure unquestionably exceeds the policy limits, yet the insured desires a continuing defense.

A common policy provision provides that an insurer has a duty to “settle or defend” a covered claim but that upon payment of the policy limits for “judgment or settlement” the insurer no longer has an obligation to provide a defense. Connecticut appellate courts have not squarely addressed in what circumstances exhaustion of policy limits will terminate the duty to defend, but at least one Connecticut Superior Court has recognized that exhaustion of policy limits would terminate the duty to defend based on the following policy language in a commercial policy: In Aetna Life & Cas. Co. v. Gentile, No. 0122259, 1995 Conn. Super. LEXIS 3444, 5 (Dec. 12, 1995), the insurer sought a declaratory judgment that it did not have a duty to defend following payment of the policy limits in response to seven separate claims. Id. at 4, 6. The court ultimately concluded that the payment was not the result of a “settlement” because the insurer failed to obtain a full release of the insured for one of the seven claims. Id. at 6-7. Despite its conclusion, the court plainly recognized that “if [the payment was a “settlement”] the policy limits are exhausted and there is no further duty to defend.” Id. at 7. The court concluded that the failure to obtain a release as to one of the claims precluded a finding that the payment was the result of a “settlement.” Id. at 9, 11. Thus, even though the insurer had made a payment in the amount of policy limits, the duty to defend was not terminated. Id.

Though the Gentile court initially acknowledged the potential enforceability of the exhaustion provision to terminate the duty to defend, the fact that the insurer left the insured to face excess exposure resulted in a finding that it had a continuing duty to defend and indemnify. Id. at 13. Notably, the court denied declaratory relief to the insured and awarded attorneys’ fees to the insured for both the underlying action and the declaratory judgment action. Id. at 13, 17.

Another instructive case is Chicago Title Insurance Company v. Kent School Corporation, 361 F. Supp. 2d 4, 7 (D. Conn. 2005). In that case, the United States District Court for the District of Connecticut addressed whether a policy of title insurance permitted the insurer to tender its policy limits to its insured and thereby terminate its duty to defend. The policy provided that the insurer “may terminate its liability hereunder by paying or tendering the full amount of this policy.” Id. at 8. Despite this clause, because the policy provided that “the costs and expenses of defending the title” were in addition to the policy limits and the policy was ambiguous in its failure to define the term “liability,” the court found that the insurer had a continuing duty to defend. Id. at 9-10. In so concluding, however, the court did not rule out a different conclusion based on clearer policy language.

While it does not appear that any Connecticut court has actually applied the rule permitting an insurer to terminate its duty to defend by making full payment of policy limits to enforce such a result, both the Gentile court and Chicago Title court clearly recognize this rule and the enforceability of exhaustion clauses. Gentile, 1995 Conn. Super. LEXIS 3444, 7; Chicago Title, 361 F. Supp. 2d 4, 9. Such recognition is found in other jurisdictions, as well. Further, though such decisions are presently absent from Connecticut jurisprudence, courts in other jurisdictions have allowed an insurer to exhaust limits and terminate its duty to defend.  Seem e.g. In Re: East 51st Street Crane Collapse Litigation, No. 769000/08, 2010 N.Y. Misc. LEXIS 6310 (N.Y. Sup. Ct. Feb. 18, 2010).

For an expanded analysis, click here.

Filed under Commercial General Liability, Duty to Defend, Exhaustion

Denial of Summary Judgment Does Not Automatically Establish Duty To Defend

By and on February 10, 2015
Leave a comment

In McMillin Companies, LLC v. American Safety Indemnity Company, a California appeals court found a trial court erred in finding the denial of an insurer’s motion for summary judgment on the duty to defend meant the insurer’s duty to defend was established as a matter of law.

McMillin Companies, LLC was the general contractor for a series of residential construction projects in Temecula, California.  After the projects were completed, McMillin was named in a construction defect lawsuit that arose out of the projects.  McMillin tendered its defense to the insurers of allegedly implicated subcontractors, including American Safety Indemnity Company (“ASIC”), contending it was an additional insured.  None of the insurers accepted McMillin’s tender.

McMillin sued ASIC and other insurers for breach of contract and bad faith based on their alleged failure to defend.  After numerous settlements, ASIC was left as the sole remaining defendant.  ASIC submitted a motion for summary judgment, arguing, inter alia, that it did not owe any duty to defend because its policy only covered  liability arising out of its named insured’s “ongoing operations” which had ceased prior to the occurrences alleged in the litigation.  This motion was denied on the basis ASIC had not met its initial burden of proof to show no triable issue of material fact.

At trial, McMillin moved in limine to exclude argument disputing ASIC’s duty to defend, and ASIC moved in limine to preclude McMillin from arguing the amounts it had received from the other insurers in settlement were not offsets to McMillin’s alleged damages against ASIC.  The trial court granted McMillin’s motion, finding the prior denial of ASIC’s motion for summary judgment demonstrated the existence of a disputed issue of material fact which necessitated a finding of a duty to defend.  The trial court also granted, without explanation, ASIC’s motion as to the settlement offsets.

The California court of appeal reversed, holding the trial court erred in granting the motions in limine.  Disagreeing with the trial court’s conclusion, the appeals court reasoned that the denial of an insurer’s motion for summary judgment because it failed to meet its initial burden of proof was not the same as denying the motion based on an unresolved factual dispute.  The appeals court also concluded McMillin’s settlements with the other insurers were not potential offsets to damages but rather would only affect McMillin’s right to recover any damages awarded at trial.

Filed under Bad Faith, Duty to Defend

Under Illinois Law, Nontrivial Possibility of Excess Judgment Creates Conflict Requiring Independent Defense Counsel

By and on October 10, 2014
Leave a comment

In Perma-Pipe, Inc. v. Liberty Surplus Insurance Corp., No. 13-2989, 2014 U.S. Dist. LEXIS 54867 (N.D. Ill. April 21, 2014), the Northern District of Illinois held an insurer breached its duty to defend when it refused to pay for the insured’s independent defense counsel. Although the insurer had waived all coverage defenses, there was a “nontrivial” exposure over the policy limit, which created a conflict of interest under Illinois law.

The insured, Perma-Pipe, was a pipe manufacturer sued for alleged “catastrophic” pipe failures with damages alleged over $40 million.   Liberty issued a commercial general liability (CGL) policy with $1 million per occurrence and $2 million aggregate limits.  Liberty agreed to defend, but reserved rights and allowed Perma-Pipe to select independent defense counsel.  Liberty later withdrew its reservations and retained its own defense counsel. Perma-Pipe sued.

The federal district court, applying Illinois law, found a conflict of interest requiring independent defense counsel.  Because Perma-Pipe was sued for more than $40 million, far above the policy limits, there was “a nontrivial probability” of an excess judgment. While Liberty argued Perma-Pipe had excess coverage, there was no evidence of this in the record.  In any event, the possible existence of excess coverage would not negate the conflict.

While the “nontrivial” excess exposure test may be difficult to apply, that is apparently not the case where the exposure alleged dwarfs the available coverage limits.

Filed under Duty to Defend, Independent Counsel

Washington Court Holds Agency Action Must Be Adversarial or Coercive to Trigger Insurer’s Duty to Defend

By and on June 16, 2014

While Washington courts have long held that an insurer must indemnify an insured for cleanup costs under the Model Toxics Control Act (MTCA), even where the Washington State Department of Ecology (DOE) has made no threat of formal legal action, the Washington courts had not addressed the issue of what triggers an insurer’s duty to defend.

On June 2, the Washington Court of Appeals addressed the latter issue in Gull Industries, Inc. v. State Farm Fire and Cas. Co. and Transamerica Ins. Group, et al., 2014 Wash. App. LEXIS 1338, and held that an agency action must be adversarial or coercive to qualify as the functional equivalent of a “suit” when that term is undefined in the policy.

In Gull Industries, Gull undertook voluntary remediation of his gas station after finding contamination from an underground storage tank.  Gull notified the DOE, which acknowledged receipt of Gull’s notice of contamination.  The DOE letter also stated that DOE has not determined that Gull is a potential liable party; advised Gull to be aware of state requirements but did not advise of any consequences in failing to comply with such requirements; and noted that Gull may request assistance from the DOE.

Gull subsequently tendered its defense and indemnity to Transamerica Insurance Group (TIG) and State Farm, which both provided liability coverage for the gas station.  The policies provided a duty to defend “any suit against the insured,” but “suit” was undefined.  After TIG and State Farm denied the tender and Gull filed suit, the trial court granted summary judgment to TIG and State Farm on the duty to defend.

On appeal, the Court of Appeals adopted the analysis in Ryan v. Royal Ins. Co. of America, 916 F.2d 731 (1st Cir. 1990) to determine what triggers the duty to defend “any suit” when the owner of contaminated property faces strict liability under MTCA.  The Court of Appeals held that the term “suit” is ambiguous in this context and may include administrative enforcement acts that are the functional equivalent of a suit to trigger the duty to defend if the governmental agency communication involves an explicit or implicit threat of immediate and severe consequences by reason of the contamination.

In this case, the Court of Appeals held that the DOE letter to Gull did not present an express or implied threat of immediate and severe consequences by reason of the contamination.  As a result, Gull was not faced with the functional equivalent of a suit, and TIG and State Farm had no duty to defend.

In light of this case, it will be important for insurers to carefully examine agency communications to determine whether such communications would qualify as a functional equivalent of a suit to implicate the duty to defend.

Filed under Duty to Defend, Governmental Agency Actions

Newer posts →